Following Food Ban, Russia Moving On From Europe

Like a scorned lover who can't wait to find a new romance to replace the old, Russia is quickly moving on from Europe.

Following last week's order from Moscow to sanction European food imports, Russia is now turning to Brazil, New Zealand and even China is courting them.

"This (ban) could provide a major opportunity for Latin American economies, especially for Argentina, Brazil, Chile, Ecuador, Paraguay and Uruguay," said Robert Wood, an analyst for The Economist Intelligence Unit. Last week, Wood wrote for his subscribers that Russian companies have agreed to "generous business deals" with agribusiness power houses Argentina and Brazil.

In Moscow this week Russian agriculture official Sergei Dankvert held meetings with diplomats from several Latin American countries, including Argentina and Brazil, to discuss replacing European imports of chicken, beef and other food items. Dankvert said the government would lift restrictions on importing meat, fish and produce effective immediately, which doubled the number of meat packing facilities permitted to sell to Russia. For their part, Brazilian officials were the most enthusiastic. The country is the world's largest beef and chicken exporter, and the thought of replacing European companies on long term supply contracts is a positive in an economy that's been full of negatives.

Russia says it is moving on from European food suppliers following sanctions last week.

On Monday, Chinese agribusiness firms said that they too were interested in Russia.

Last year, Chinese companies exported $2.1 billion in agricultural products to Russia. "China is ready to further work with Russia to expand bilateral trade in agricultural products," ministry spokesperson Shen Danyang was quoted saying by the Xinhua news agency on Monday. "China...will continue to create the conditions for bilateral cooperation in the energy and agricultural sectors," Danyang said.

Just as Europe is looking to diversify away from Russia, Russia is looking to move on from Europe as well. It's eastern neighbor isn't as rich, but it has a lot of room to grow. And not just in agriculture, but also as a potential investor and customer for Russian natural gas.

Europe and Russia have been in a political stand-off over the political crisis in Ukraine. The crisis, which began late last year over a trade deal rejected by then-president Viktor Yanukovych, led to his ousting on Feb. 22, and the annexation of Ukrainian territory on March 17 by the Russian Federation. Sanctions immediately followed by Brussels, with Washington in lockstep with its NATO allies.

Europe upped the ante recently by banning E.U. firms from conducting business with a number of important Russian companies, including banning trade in components used for oil and gas drilling, financing energy projects in Crimea, and banning business with the VTB Group, one of the biggest banks in Russia.

VTB Group's subsidiary, VTB Capital, was not sanctioned by Brussels, a company press agent told FORBES recently. VTB Capital is one of the largest Russian investment banks operating in Europe. It also maintains an office in New York.

Barclays Capital said in a note last week that Russia's food ban was a bad move, citing price hikes waiting in the wings. Higher food prices would push up Russian inflation, already over 6%, and force the Central Bank to tighten monetary policy at a time when the economy is suffering. Russian GDP likely contracted in the second quarter as a result of poor business sentiment and capital flight.

Sanctions have been taking their toll on the physical economy as much as it has on investor sentiment. The equity market, meanwhile, remains in the domain of foreign investors looking for deep value. The Market Vectors Russia (RSX) exchange traded fund is actually up over 14% since Crimea seceded from Ukraine. That's not bad, but still around 200 basis points below the benchmark MSCI Emerging Markets Index.

The U.S. and European Union still believe Russia is fomenting civil unrest in east Ukraine in order to make the new pro-Western government in Kiev look like imbeciles. Russia denies providing any logistical support to pro-Russia separatists in cities like Donetsk, but continues to supply "humanitarian" and other military aid to Ukraine's ethnic Russians. Kiev sees this as a violation of national sovereignty. Washington and Brussels do, too.

The tit-for-tat sanctions war has hurt Russia more than it has hurt Europe or the U.S., which conducts very little trade with Russian companies.